Thursday, August 11, 2011

Forget 2008, This Is Like 1987!

After dramatic moves in the futures markets, U.S. stocks opened higher Thursday morning after European bourses reversed early declines.

The primary focus of concern — as it was yesterday - is French banks. Societe Generale initially rallied after its CEO denied rumors the bank faces a funding crisis, then plummeted anew amid reports Asian banks are cutting credit lines to major French institutions. Other French banks such as BNP followed suit, dragging major European bourses lower before mounting a major recovery effort.

Did somebody say "fast markets"?

While some observers are drawing comparisons to 2008, David Kotok, chairman and chief investment officer at Cumberland Advisors, says the current environment reminds him of 1987.

That year, U.S. stocks suffered "60 brutal days ending Black Monday," he recalls. "This looks to me to have the same kind of emotional setup and panic as then."

The question, of course, is whether another 1987-type crash is in the offing. Kotok believes Monday's 6.66% decline may have been the 2011 edition. "What we don't know and won't know for a while is if Tuesday was an intraday reversal," similar to what occurred the day after Black Monday in 1998, he says. "It has the makings of a selling climax, it's not clear. You don't know until after the fact."

By his own admission, Kotok has been early in calling a bottom this summer but is "persisting with it because we don't think the world is coming to an end."

Kotok's optimism is based primarily on a belief this is not another 2008, as well as a view stocks are cheap on a fundamental basis.

"What we do know is, in the U.S., the equity risk premium is huge," Kotok says, referring to the comparative returns between stocks and Treasuries (or cash). "From a valuation view, you can buy American large companies cheap," he says. "That doesn't mean they don't get cheaper [but] we view this as entry level."

Note: The satellite feed was lost during the taping of the accompanying video -- if you listen closely, you can hear the torrential rain in the background. Stay tuned for another segment, conducted via phone, where Kotok explains why he thinks this isn't another 2008, even as the similarities continue to pile up.

Remember, a couple of days ago, I said that August 9th, 2001 might be an important low like March 9th, 2009. Go back to read my comment on post-deleveraging blues following the 2008 smashup. I spoke to sharp guy from a NYC hedge fund yesterday and he confirmed that a lot of the panic selling was just hedge funds liquidating their positions. Importantly, some well known hedge funds are down 20-30% YTD!YIKES! They need to make up those losses and fast.

They are selling indiscriminately, trying to shore up cash to meet redemptions, which has created unbelievable opportunities, especially in some mall caps that are down 80% in a few weeks!!!! Absolute nonsense! That is why I don't buy the nonsense that "markets are always right." YEAH RIGHT!!

I see calm being restored and remain short gold, short vol (long XIV) and I like all these high beta stocks at these levels (symbols only, mostly solars and tech): ASYS, BRCD, DQ, EMKR, JASO, JDSU, JNPR, LVLT, LDK, SATC, SOL, STP, TSL, WFR, YGE. The networking stocks like JDSU and JNPR are due for a sharp rally but so are many others. In Canada, DAN.V is my spec mining stock (see my comment on phosphate in Canada). There are plenty more, but these are the ones I am focusing on right now (click on image to enlarge):

Tread carefully, however, these are crazy markets dominated by HFT computers and ruthless sharks at big bank prop desks and hedge funds. Below, watch David Kotok's interview. For me, he's the only one who makes sense out of all these so-called "experts," and I am more of a raging bull now than ever.

Importantly, despite volatility, stay long risk assets and keep buying the dips hard.Lots of institutions need a big beta boost to make up for the savage losses they just experienced.

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